Business Credit: 5 Things I Wish I’d Known Earlier

So, you’ve registered your business, obtained an EIN, opened a business bank account, budgeted your monthly expenses, and now are ready to open the doors. Now What? The next thing you should focus on (aside from operating your business) is establishing business credit. Most small business owners are unaware of the difference between personal and business credit or even that there is such thing as business credit. As a business owner, it is important to know the differences and where it coincides.

BUSINESS CREDIT VS PERSONAL CREDIT

Personal credit is identified by Social Security Number (SSN), whereas business credit is identified by Employer Identification Number (EIN). These distinct numbers allow the credit bureaus to link your business’s financial history back to your business, while your personal credit history gets tracked back to your individual financial history.

A Business Credit Report reveals the same type of data as a Personal Credit Report. The only difference is that the data provided is specific to a business’s debt repayment and public records such as bankruptcies, tax liens, and collection accounts. Any public record on your business can be reviewed.

It is said that business credit does not impact your personal credit and vice versa, which in some cases is true. In the event you are trying to acquire funding from a financial institution, you are required to provide a personal guarantor which would be yourself. In this case, your personal credit would need to be at a place where you would be able to guarantee the loan for the business.

Personal credit scores are factored by payment history and credit use (also referred to as credit utilization). Other factors are the duration of credit history (how long you’ve been using credit) and how many lines of credit you currently have that are open. Credit bureaus use the same information as a personal credit score in addition to information specifically for your business. There are additional evaluations considered when calculating your business credit scores such as company size and industry risk. Industry risk refers specifically to anything that could threaten a company’s financial health or lead to economic failure within the business’s industry.

A lender has the right to pull the personal credit score of any person owning 20% or more of a company. This is an important fact to be aware of when choosing your business structure and ownership percentages.

CREDIT SCORES AND WHAT THEY MEAN

There are three major credit bureaus that calculate and provide personal credit scores, Equifax, TransUnion, and Experian, each having their own way of calculating your score. Personal credit scores range from 350 – 850. A credit score of 720 or better allows for better interest rates and payment terms on credit cards and different types of loans. Many times, individuals have bad credit or have not established any credit. Wells Fargo offers the following tips to help to establish a credit history:

1. Establish banking relationships – open checking and savings accounts. This will not directly establish your credit history, but lenders typically ask for bank account numbers on credit applications. If the account remains in good standing, this can help the lender know that you can responsibly manage money.
2. Be consistent. When reviewing a credit or loan application, lenders look for a stable income source, work history, and place of residence.
3. Apply for a department store card or a gas card. These may be easier to obtain than regular credit cards and typically have lower credit limits. Be careful, however, as some of these cards come with high interest rates. It might be a good strategy to charge only small items and pay your card balance off in full each month.
4. Apply for a secured credit card. To help build your credit history, a secured card works like any other credit card, but requires a collateral account. Some companies will evaluate your history and may consider graduating you to an unsecured card if you meet their specific criteria.
5. Consider a co-signer or co-applicant. Applying with a cosigner or co-applicant may help you qualify or acquire better credit terms, but remember that your cosigner or co-applicant also takes responsibility for payment. That means the credit history will be reflected on both of your credit reports.

Business credit is determined by Equifax, Experian, and Dun & Bradstreet with a range of 0 – 100. A Business credit score of 75 and higher will allow you to attain larger loans and favorable payment terms. Nine times out of ten, a new business owner has never heard of Dun & Bradstreet and is unaware that their business will have its own credit score. The Dun & Bradstreet D‑U‑N‑S (data universal numbering system) Number is a unique nine-digit identifier for businesses and identifies a business from being unique from any other business in the Dun & Bradstreet data cloud. Good business credit will allow you quick access to funds, better control of your business capital, lower interest rates, cash flow during slow seasons, and will help to improve your personal credit score. Here are some helpful ways to build your business credit:

1. Get a DUNS number – Register online at the Dun & Bradstreet website.
2. Open a line of credit with your vendors – Identify vendors you work with regularly and ask if they report your payments to credit agencies. Request a line of credit with the vendor.
3. Open a business credit card or line of credit – Request and select a business credit card that you can commit to long-term. Identify small, recurring expenses that you can easily pay back. Pay for these expenses using your credit card or line of credit.
4. Make payments on time or early – After opening one or two credit cards at a time, using less than 10% of your available credit.
5. Review your credit report – Do this often! Dispute any errors with the credit bureau if you see them on your credit report.

As you can see, personal and business credit are measured separately as two distinct credit histories. Though at times they can and do overlap with one another, for the most part, you can take steps to protect and build each one separately. Building business credit is essential to obtaining favorable credit and financing terms that can save you money as you invest in your small business.